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Monday, June 3, 2013 - Page updated at 07:30 p.m.
Return of P&G’s former CEO puts his reputation at stake
By Lauren Coleman-Lochnerand Carol Hymowitz
In an interview after agreeing to return as Procter & Gamble’s chief executive officer, A.G. Lafley made clear he hadn’t been seeking the job.
“The board went through their usual thorough and comprehensive review of alternatives, and one way or another, they concluded that I was the best option for right now, and they asked me,” Lafley said May 23 after P&G announced he was replacing his hand-picked successor, Bob McDonald. “I wasn’t sitting at home waiting for the board to call.”
Taking the post holds risks for the 65-year-old executive. Since stepping aside almost four years ago, he has retained a rock-star reputation as one of America’s most lionized corporate chieftains. Now his legacy will rest on whether he can turn around P&G, an iconic company that brought the world Tide and Pampers and yet has failed to adapt to changing circumstances.
Lafley’s second stint recalls the successful comebacks of former leaders from Steve Jobs to Starbucks’ Howard Schultz. Yet for every Apple or Starbucks, there’s a Dell or Yahoo, where Michael Dell and Jerry Yang, respectively, failed to reverse sagging fortunes.
Lafley’s challenges are manifold. In established markets, Cincinnati-based P&G has lost customers in such key categories as detergents. The beauty business, which last year generated 24 percent of sales, is ailing as competitors such as L’Oreal seize share in emerging markets.
Once known for inventing new categories, P&G hasn’t had a $1 billion hit since re-imagining the household mop with the Swiffer a decade ago. Meanwhile, promising executives left under McDonald, making it harder for Lafley to groom a successor at a company that has traditionally promoted its own.
He also will have to put P&G on a firmer financial footing. Besides continuing McDonald’s cost-cutting program, Lafley may need to consider spinning off smaller brands to raise money, said Matt McCormick, who helps manage $9.1 billion, including P&G shares, at Cincinnati-based Bahl & Gaynor.
“This is not going to be easy,” McCormick said in a telephone interview. “Everybody has high expectations, and it’s up to A.G. Lafley to deliver.”
For the past nine months, McDonald, 59, had been monitored closely by the board. He bought himself time as he implemented a $10 billion cost-cutting plan and made progress through the second half of 2012.
Board support evaporated, however, after sales gains for the first three months of this year came in at the bottom end of the company’s forecasts, said another person.
By then, some P&G executives were expressing doubts about McDonald’s ability to turn around the company, according to a person familiar with the situation. McDonald’s mantra — “living a life driven by purpose is more meaningful and rewarding than meandering through life without direction. My life’s purpose is to improve lives” — seemed more like a sermon than a sales pitch employees could use to push toothpaste, skin creams and detergents. It was a departure from Lafley’s focus on the consumer as king.
Originally, McDonald — a methodical, detail-oriented West Point alum — was seen as an operations guy who could steer a cautious course through a treacherous world. Yet by the time he became CEO, the U.S. was in recession, and P&G was selling BMWs when cash-tight consumers were looking for Kias.
McDonald introduced lower-priced products to woo back customers going to cheaper generic brands. He continued P&G’s march into emerging markets, vowing to grow the global customer count by 25 percent, to 5 billion, by 2015.
It didn’t work. Sales growth has averaged 2 percent over the past three years, compared with 8.7 percent for Unilever, according to data compiled by Bloomberg Industries. The company’s fourth-quarter forecast trailed analysts’ estimates, prompting shares to plunge the most in more than four years.
Last year was McDonald’s annus horribilis. Though he introduced a plan in February 2012 to cut $10 billion in costs through 2016, some analysts and investors expressed dismay that the strategy was too timid. Skepticism mounted as P&G cut its own profit forecast three times. Then, in July, activist investor Bill Ackman bought a stake then valued at $1.8 billion and began to agitate for McDonald’s ouster.
Now that Lafley is back in charge, he’ll need to take bold moves to show he’s more than a caretaker, McCormick said.
“I think everything is on the table, from cuts to spinoffs to acquisitions,” he said. “His bottom line is to grow this sucker.”
In the shorter term, Lafley should consider spinoffs or sales, particularly in a climate where private-equity firms are willing to pay top prices, McCormick said, as he did with his 2001 sale of the Jif and Crisco brands to JM Smucker.
Cranking up P&G’s innovation engine will be another challenge because spending on research and development has been sliding. In recent years, the company’s product pipeline has been mainly focused on reformulating rather than inventing. As a result, P&G has lost customers in the U.S. and other developed countries, who’ve switched to cheaper products made by such rivals as Unilever, as well as store brands.
The innovation slump began after Lafley decentralized R & D, making business-unit heads responsible for developing new items. Doing so inadvertently slowed breakthroughs by more closely tying research spending to immediate profit concerns, Bruce Brown, P&G’s chief technology officer, said last year.
Between 2003 and 2008, the sales of new product rollouts shrank by half. By the time McDonald became CEO in 2009, the number of what the company considered to be big product breakthroughs had fallen to an average of fewer than six per year as unit heads focused on short-term results and smaller inventions, Brown said.
Meanwhile, the company has lost share in its two largest beauty brands, Olay skin care and Pantene hair care, Chief Financial Officer Jon Moeller said at a conference this month. “Both brands are underperforming,” he said. “We know it. We’re working hard to fix that.”
Not everyone says Lafley needs to reinvent P&G. To Ali Dibadj, an analyst at Sanford C. Bernstein in New York, the task is more about wisely redirecting P&G’s resources.
“I don’t think it’s a whole-hog, have-to-redo-everything,” he said. McDonald “spent a lot of money without being focused on the return of those businesses.”
Extending a legacy
The Lafley legacy may be in jeopardy if he doesn’t act quickly, McCormick said.
He may have a grace period of a quarter or two, then “the clock is ticking,” he said. “People are going to say, ‘Welcome back, what have you done for me lately?’ ’’
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